How Does the United States Military Budget Affect the Economy?

August 11, 2017

President Donald Trump ran his campaign largely on the premise that the United States’ engagement in international trade, diplomacy, and development has weakened its position in international politics.

The most readily available critique of large military budgets is that they squander money from potentially more important federal programs. Indeed, President Trump’s purports to do just that; the proposed $54 billion increase in defense spending above the Budget Control Act cap will cut nonmilitary programs by the same amount. [1] There is no doubt that some of the 37% of Americans who believe the country spends “too little” on defense may have received some sticker shock. [2]Raising the bar even further, House Armed Services Committee chairman Mac Thornberry presses for a $696 billion budget in FY 2018, more funding than at any point in the Iraq and Afghanistan wars and $28.5 billion above President Trump’s initial request. [3]

Image: The chart shows U.S. defense spending trends from the year 2001 to 2017.Source: Wiki CommonsCredit: Wiki Commons

This potential exchange Americans face in the upcoming fiscal year is a new iteration of a model analyzing the relationship between defense spending against domestic spending – “guns or butter”. While simplistic, the guns or butter model demonstrates that there are tradeoffs in discretionary spending. Should the United States spend more protecting its civilians or providing for them? Americans are roughly split over whether the country spends too much, too little, or just enough on defense. [2]

Image: This curve shows the trade-off between gun production and butter production.Source: Wiki CommonsCredit: Wiki Commons

The size of the U.S. military budget has other significant effects on the economy. A 2010 study by political scientist Uk Heo measured the impact of defense spending on economic He found that increased spending “shows a contemporary, harmful effect on economic growth, but the lagged effect…[offsets] the negative effects.” [4] In short, going to war or building up causes an initial dip in growth, but the overall effect is insignificant. However, a large military budget leads to many other externalities, such as tax hikes, large deficits, inflation, and, most notably, cuts to social welfare. [4] In addition, more spending on defense programs likely decreases private investment due to a bottleneck effect on capital stocks. [4]

The global security environment has changed significantly since President Obama left office. Russia has further asserted itself in the North Atlantic and Black Sea regions, as well as Syria. China continues to build its navy and invest in its military. North Korea successfully tested its first ICBM. However, these changes do not give the new administration carte blanche to neglect the equally, if not more vital, needs of constituents. The Department of Defense must decide which regions truly demand a more forward force structure, and from which the United States can afford to relax its grip.

In many cases, the United States can achieve the same goals without forward military presence through diplomacy – often with far less collateral damage. In March 2013, when now-Secretary of Defense James Mattis was serving of Commander of U.S. Central Command, he said in a Senate Armed Services Committee hearing that “if you don’t fully fund the State Department, then I need to buy more ammunition.” [5] In short, the less the United States devotes to diplomacy and development, the more it needs to defend. For example, should the United States does not work to incorporate China into the existing international order, it will have to invest more heavily in hard power approaches for preventing geopolitical crisis in the first island chain.

Image: These pie charts show the percentage breakdowns of the FY 2018 budget request.Source: U.S. Department of DefenseCredit: U.S. Department of Defense

The United States has traditionally been at the forefront of military research and development. To maintain this status, the Department of Defense (DoD) relies heavily on contractors. Of the top ten defense contractors, eight are located in U.S.; the remaining two reside in NATO countries. [6] As such, the U.S. not only outcompetes the rest of the world in military spending, but also in R&D. These two facets are not inseparable, and in fact the latter presents a boon for lowering the economic burden of the former. It takes far less time to train soldiers than to, say, build and commission aircraft carrier or design and deploy an entirely new system. However, RDT&E, or research, development, test, and evaluation, accounts for only about 13 percent of the DoD’s proposed $640 billion total budget; procurement of these systems, ships, and the like will account for less than 20 percent. [7]

Accordingly, pursuing diplomatic means to mitigate conflicts instead of military means may free up room to reduce troop, equipment, and vehicle levels abroad, thereby reducing the personnel and O&M costs. , Prioritizing the United States’ technological edge is also a sensible way to appease the hawkish voices in the federal government and reallocate more funds to the “butter” side of spending, Slowly and steadily replacing outdated systems for newer, safer, and less costly ones will maintain readiness without driving up personnel or O&M costs. Should current and future administrations heed Secretary Mattis’ words on the importance of diplomacy, they may unfetter the economy from the negative consequences of a large military budget. Regardless of how the next year’s fiscal budget changes moving forward, there are clear implications to domestic programs, spending, and savings. Policymakers of both parties should duly note these effects to butter before weighing in on guns.

Student Blog Disclaimer

The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

<h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> ﻿Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>